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Citibank suspends student loans to two year colleges

Citibank's unexpected decision applies to students at all of Minnesota's community college and technical schools. It's another sign that the student loan industry is bending under the weight of the credit crunch triggered by the home loan mortgage crisis.

Scott Roelke, President of the Minnesota Association of Financial Aid Administrators and the Financial Aid Director for Dakota County Technical College, said CitiBank is doing a disservice to students in two-year institutions even as it retains federal subsidies for longer, more profitable students loans.

"They're staying in the program, but they're now determining which students they will and which students they will not lend to. And in my view, with a federally subsidized program, that's not OK," Roelke said.

Roelke also worries that the pull-out by Citibank and JP Morgan Chase, which has less of a presence in Minnesota, marks a trend that is troubling.

"If that's the case, we have our public two-year open enrollment institutions that are supposed to be serving the public and many times lower income students that they could effectively be frozen out of higher education," Roelke said.

Roelke said students that already have Citibank loans will now have to go through the trouble of finding a new loan source, which could create problems when it comes time to pay the loans back.

"Going forward they would have to select a different lender. That could lead to some issues where they might have multiple lenders. [There's the] potential they would have multiple payments they would have to make," Roelke said.

CitiBank is the nation's second largest student loan lender. Others, including Minnesota-based Northstar Education Finance, TCF Financial and Academic Funding Group are limiting or ending federally subsidized low interest student loans. They go by such names as Stafford and PLUS loans.

In recent years the business has been profitable for lenders who make money on upfront fees then bundle the loans for sale to investors on the secondary market. The credit crunch has made it difficult for lenders to find investors to buy the loans.

The tight student loan market could make for higher fees and tougher credit requirements for borrowers. Still, experts insist student loans remain plentiful and accessible with almost 2,000 lenders remaining. MnSCU spokeswoman Melinda Voss said CitiBank's decision is a concern, but it's too early to say whether it will be a significant problem for students.

"If students are concerned they may be talking to financial aid officers on some of our campuses. But our understanding is there are still other lenders out there and our students are getting loans," Voss said.

The nearly daily announcements of lenders getting out of the student loan business comes just as many high school graduates and returning students are finalizing student aid for the coming academic year.

Barmak Nasirian is among those who caution against interpreting the news as a student loan disaster. Nasirian is Associate Director for the American Association of Collegiate Registrars and Admissions Officers. He said many of those getting out are private lenders who offer loans with variable interest rates and no lending caps that are less desirable than the federally subsidized loans.

"By the time you read the 20th one you think 'oh my God it's an exodus. It's a real crisis'. And it's not," Nasirian said. "It is not, because there is plenty of money available and I have yet to find a single example of a student who sought a federal student loan and was unable to get it because there are no lenders available to compete for his or her business."

In another development today, Bank of America, one of the nation's largest student loan providers, said it is ending its private student loan business for the coming academic year. These are loans not subsidized by the federal government. Bank of America said it would continue to offer federally subsidized student loans.